Killing it like a hooker in Hong Kong

Minor metals, major money
It isn’t just the well-known metals that have been on the up in recent years, says Dave Forest of Casey Research. Many of the ones you’ve never even heard of have been soaring too.

Encouraged, no doubt, by the spectacular gains in uranium, many investors have come to realise that there is money to be made outside the centrally traded metals.

A number of the lesser-known metals, flying under the radars of most investors, have quietly outperformed gold, silver, copper and nickel many times over.

Probably the best-known example is molybdenum – a steel additive – which has appreciated over 1,000% in two years. But even iron ore has jumped 71.5% so far in 2005.

There is a host of other “minor metals”, which are less well-known, but, in many cases, equally profitable. The following is a quick reference guide, from antimony to vanadium, to some of the lesser-known metals, covering their uses, production, price history and, of course, the firms that benefit from selling them.

Not all of the companies mentioned are ones that we watch very carefully here at Casey Research, and some therefore haven’t been subjected to our detailed due diligence. Rather, they are included here to give you some “first-pass” ideas for further research. As always, your odds of coming out ahead are enhanced if you do your homework before investing.

Antimony

Antimony is used in flame retardants, plastics, glass for TVs and computer monitors, and in lead-acid batteries. Production is mainly concentrated in China, which accounted for 85% of world output in 2000. The average annual US price for antimony has increased more than 100% over the last five years, from $0.66/lb in 2000 to $1.27/lb in 2004, spiking as high as $1.55/lb in October last year. The current price is about $1.45/lb.

These price increases may not be sustainable as there are a variety of metals and compounds that can be substituted for antimony if prices get too high. As prices strengthened in 2004, global consumption dipped, with use in the US falling to a five-year low. Yet because secondary US production of antimony has fallen 47% in the last five years, US stockpiles in 2004 were still reportedly at a five-year low.

One of the companies we watch, Eurasian Minerals (V.EMX), is currently carrying out exploration in the Zajaca district of Serbia, which has been a large producer of antimony in the past.

Crosshair Exploration (V.CXX) is exploring Newfoundland’s Botwood basin, a region that has significant antimony reserves. Both these firms could benefit from credits on the metal if the price keeps rising.

Beryllium

Beryllium is used to make speciality alloys for electronics, defence applications and the automotive industry, and demand strengthened in 2004, with US consumption rising to 220 tons from 180 tons in 2002.

The metal’s high-end applications give it a small but steady market. Prices are set on contract and have thus remained steady over the past five years. About 65% of beryllium reserves are found in the US, although the only mine production during the past year has come from one private Utah-based firm, Brush Resources. Reserves are also known in China, Kazakhstan, Mozambique and Russia.

Bismuth may have significant growth potential as it is increasingly being used as a steel additive and as a non-toxic lead substitute in other alloys. US consumption reached a five-year high in 2004 at 2,400 tons, up 12% from 2003.

The metal is mainly produced as a byproduct of lead ore, which has meant limited production over the past few years, as there have beenfew lead mine start-ups. This may change now that the lead market is is picking up.

The bismuth price rose significantly throughout 2004, averaging $3.43/lb in the fourth quarter – up 19.5% from $2.87/lb in 2003 – and spiking as high as $3.85/lb in New York. If the price stays high, the market may see some moth-balled capacity come back online, notably the Tasna Mine in Bolivia, which is one of only two facilities in the world producing primary ore.

Tiberon Minerals is in the process of completing a final feasibility study on its Nui Phao deposit in Vietnam, and Fortune Minerals (T.FT) is working up a feasibility study at its NICO project in the Northwest Territories. QGX’s Mongolian property also contains bismuth.

The market for this toxic metal has shrunk over the past few years, due to tightening environmental controls, with US consumption shrinking about 70% since 2000. More than three-quarters of the cadmium still used for industrial applications now goes into batteries.

The decline in production has recently caused the price to rise to an average $0.60/lb in 2004, up from $0.16/lb in 2000. Most recent price reports show the pace of price increases has accelerated in 2005, with cadmium currently going for as much as $0.90/lb.

The market may soon be hit by an EU proposal to ban batteries containing more than 0.002% cadmium, but consumption for battery making in developing nations may offset this. Klondike Gold Corp (V.KG) holds several mines in British Columbia that have in the past produced some 200 tons of cadmium. Noranda also produces cadmium as a zinc byproduct.

Update: Noranda merged with Falconbridge Ltd in 2005, which was in turn acquired by Xstrata in 2006.

Chromium

Largely used as a component of stainless steel and superalloys, chromium has benefited from the strength of the global steel market, with the average price for chromite ore rising to $100/ton in 2004, up from $54/ton in 2003.

The price rise was partly due to the strengthening of the rand. South Africa produces more than half the world’s chromite, and the strong currency has forced producers to up prices in order to stay profitable.

The price rises have continued this year, with some ores fetching $195/ton. The outlook is good. If prices were to fall, it would probably force higher-cost producers in China and India to shut their doors, thus tightening supply. Noble Metal Group (V.NMG) is planning a drill programme this summer on its Kiethley Creek project in British Columbia. Niogold Mining (V.NOX) also has chromium targets on its Le Tac property in Quebec.

Cobalt

Cobalt is used in a variety of speciality chemical and metallurgical applications, such as jet-engine superalloys and, to a lesser extent, steel.

Cobalt enjoyed a surge in price during 2004: the average price on the year jumped to $24.50/lb from $10.60/lb in 2003. But toward the end of the year, high prices encouraged substitution, causing the price to drop back to its current $16.50/lb.

The cobalt market may be adversely affected by the development of copper-cobalt projects in the Democratic Republic of Congo, a nation that hosts nearly half the world’s cobalt reserves, which have largely gone untapped in recent years. With peace breaking out in the area, these reserves should hit the market – and the cobalt price.

Tenke Resources and International Barytex (V.IBX), both of which we follow at Casey Research, are both advancing projects in the DRC containing significant cobalt credits. Such operations can produce cobalt relatively cheaply as a byproduct and could greatly increase the global supply of the metal.

Update: Tenke was acquired by Lundin Mining Corp in 2007.

Manganese

Manganese is a steel additive and consumption in the US increased by 50% in 2004 to 925,000 tons, reaching its highest level since 1981. Prices have risen accordingly, from an average $2.30 per metric ton unit of manganese content in 2002 to as high as $4.50 earlier this year.

The major driver behind the run-up in the manganese market has been increased steel production, both in China – where output was up nearly 25% in the first four months of 2005, year on year – and the US. Between 2001 and 2004, use of chrome-manganese steels grew 125%. Barring a major collapse in commodities markets, steel – and therefore manganese – should stay strong.

Peruvian explorers Vena Resources (V.VEM) hold the Azulcocha project, which has produced manganese in the past and hosts an estimated 3,295,000 tons of high-grade zinc and manganese ore. The firm is currently completing a feasibility study on the property.

Selenium

Selenium has been one of the biggest movers over the last year, with its price up from an average of $5.68/lb in 2003 to a current $51/lb – nearly an 800% increase.

The metal is used as an additive in glass, in the manufacture of electronics, as a dietary supplement and as a component of alloys. The price has risen even in the face of a sell-off in 2003 of large stockpiles of the metal, which had accumulated during a period of low prices.

Much of the world’s production is committed to long-term contracts, which means there is almost no selenium available on the spot market, a factor that has helped drive prices up as panicked buyers searched for supply. Selenium is almost entirely produced as a byproduct of zinc and copper mining.

This is another reason for the recent price strength; depressed production of these metals over the years meant there was little output of selenium. With base-metals production now ramping up, there are several producers who could put out significant amounts of “sweetener” selenium. As global production of copper, zinc and nickel increases, it is almost certain that selenium output will rise too.

Most of the world’s known selenium reserves are in the US, Canada, Chile, and Peru. Increased prices for the metal have recently breathed life into a number of formerly uneconomic projects, including Yukon Zinc’s (V.YZC) Wolverine deposit in the Finlayson district of the Yukon. Partners Atna Resources (T.ATN) and Consolidated Pacific Bay Minerals (V.CBP) are also working the Ty Property, which reportedly contains selenium.

Tungsten

Tungsten is primarily used in speciality alloys. China is, again, the key to the historically volatile tungsten market. In 2004, the Chinese produced 88% of the world’s tungsten. Given this near monopoly, the tungsten price is vulnerable to events in China. Over the past five years, the Chinese government has moved to restrict tungsten ore exports.

The move has been motivated by greater domestic demand for the metal and by a shift toward exporting finished tungsten products rather than raw ore. In 2004, US imports of Chinese raw tungsten averaged 783 tons per month. In January of 2005, it was only 694 tons.

In 2003, the market was also hit by the closure of the only operating Canadian tungsten project (operated by North American Tungsten, V.NTC). The resulting supply shortage has driven the spot price up from an average $50 per metric ton unit (mtu) in 2003 to recent highs of $220/mtu.

Given this run-up, NTC is now considering reopening Cantung, which, along with another of the company’s deposits, holds 15% of world tungsten reserves. NTC’s share price has skyrocketed, recovering from as low as C$0.15 in late 2004 to a current C$1.42 – up 850%.

Sultan Minerals (V.SUL) recently acquired a mine in British Columbia, and Copper Ridge Explorations (V.KRX) is looking into a project in the Yukon. But the hopes of getting a bigger bang out of the market are looking less well founded, given that NTC is planning to restart production in August of this year, something that will increase the supply by 6.67%.

With that in mind, and remembering that world supply and demand are reported to be close to balanced, it’s unclear how much room will be left for producers coming late to the party. That said, NTC did recently suggest that it had received interest from buyers for significantly more tungsten than Cantung can produce.

Vanadium

Vanadium is mostly used in metallurgical applications and the price for vanadium pentoxide has risen from a five-year low of $1.34/lb in 2002 to a recent high of $22/lb, a gain of 1,542%.

While the surging steel market increased US vanadium demand by about 13% in 2004 (and by an undetermined, but large, amount in China), the market has also benefited from tightness on the supply side following the apparently permanent closure in 2003 of two major producers, including Australia’s Windimurra Mine and South Africa’s Vantech Mine, taking some 11,500 tons of annual production off the market, over a quarter of total world output in 2003.

Chinese output also appears to have played a role; in 2003, mine production from the country dropped to 13,200 tons, down from 33,000 tons in 2002, in the face of increased domestic demand and closures of low-quality operations.

As with metals such as manganese and molybdenum, the fate of vanadium is largely dependent on the steel market. However, there has already been a significant supply response to the increased vanadium price, with global production rising 9% in 2004.

South Africa’s Highveld Steel and Vanadium has announced plans to increase its output of the metal by 30% over the next two years, which would bring 20,000 tons of new metal to market, increasing global output by nearly 50%. As Xstrata, one of the world’s largest vanadium producers, points out, this means that the short-term outlook for vanadium demand might look healthy, but it is “unlikely to be sustainable over the longer term”.

Another development that may speed the decline of the vanadium price is the boom in uranium. Vanadium is often found within uranium deposits. As more uranium mines are brought on stream, more vanadium may begin to turn up. Such operations may be a better way to play the vanadium market, as combined uranium/vanadium producers will be more stable than primary vanadium miners.

Obviously there are real investment opportunities to be had in the minor metals. And there are more niche markets than the ones mentioned above, such as rhodium, gallium, thorium and osmium.

But when it comes to non-exchange-traded metals, there are a few important considerations to bear in mind. First, the overall size of the market: while some of the metals mentioned here, particularly the steel-making compounds, have global markets in excess of a billion dollars annually, many minor metals only trade in the millions per year.

This is important, because without a central exchange to buy metal, it’s up to producers to seek out buyers and secure purchase contracts. In a market that only does a small volume of business yearly, it’s harder for a start-up operation (the type speculators look for to yield sizeable returns) to break in. In a billion-dollar market, the range of opportunities is usually larger.

Also consider the diversity of the market for the various metals. Molybdenum, manganese, chromium and vanadium are all mainly dependent on a strong steel sector. If this market turns down – which it could in the event of a significant softening in the US or Chinese economies – prices for these metals will also drop. However, metals like antimony and selenium are used in more diverse applications, and so are more robust in the face of shifting economic dynamics.

Finally, it pays to cast a sceptical eye over pure plays in these metals, given their historically volatile price ranges. Considering that it can take several years to identify, prove up, permit and put a deposit into production, firms just starting now on a vanadium or tungsten deposit may find themselves behind the curve – the price may be falling just as they begin putting out their first metal.

That’s not to say there won’t be opportunities for pure producers; it’s possible that the steel sector, for example, could stay strong for several more years, providing a market for new manganese or molybdenum miners.

Investors shouldn’t get giddy looking at current lofty prices, but must think on a mid- to long-term basis. Ask the management of firms you’re interested in: “How low can the price of the metal go and your deposit still prove economic?”

A number of the minor metals are byproducts of larger-market metals, such as uranium and copper. If you like a minor metal, consider plays in the co-produced, larger-market metals as lower-risk vehicles for investment. If minor metals prices stay strong, these producers garner added profit. If not, they don’t totally lose out.

About

Paul Delima is a bouncing ball of energy. He is exuberation personified. Paul Delima lives between Shanghai and Jakarta, speaks four languages and breathes economics like others snort coke.

He is overqualified, overpaid, underworked, and takes great pleasure for calling bullshit when he sees it.

He likes receiving non-spam comments.

Paul Delima is originally from Southern California, and graduated from Harvard without honors in 1997. He moved out to Hong Kong and worked for an investment bank, got a CFA along the way, rode out two Asian downturns, and joined a hedge fund.

Paul Delima now does Asian bankruptcy work, and has an active interest in distressed firms of all kinds.